Pension scheme trustees: what you need to know about investments and ESG

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Since 2005 trustees have had to record in the statement of investment principles (SIP) their approach to social, environmental or ethical considerations when selecting, retaining and realising investments. For most this has been a tick-box exercise saying, for example, that they left this to their fund managers. 

With growing focus on environmental, social and governance (ESG) issues, recent changes have been implemented to pensions legislation introducing new disclosure requirements in relation to pension scheme investments and the consideration of ESG issues.

With this growing focus many trustees are unsure how ESG should be taken into account when making investment decisions. In our view ESG should be seen as another risk factor - how much weight is given to it is likely to vary from scheme to scheme and the trustees’ attitude to risk. However, it can also be financially material.

It should be noted that the requirements do not apply to all schemes – the majority of them will only apply to schemes with 100 members or more.

The Pensions Regulator’s, “A guide to investment governance” published in June 2019, provides further information on meeting the new requirements and should be referred to by trustees when considering their compliance obligations.

What do the ESG requirements mean in practice?

Whilst previously considering ESG issues when making investment decisions was likely to be a fairly rudimentary process for most trustees, with the recent changes and the likelihood of greater Pensions Regulator scrutiny in this area trustees should be placing more emphasis on ESG issues going forward.

Although the additional documentation and disclosure requirements do add to trustees’ “to do” lists, having to take into account ESG issues when making investment decisions may well not be a bad thing. Instead we view the ESG requirements as another risk factor to be considered when making investment decisions and it could be a deciding factor between two investments if all else is equal.

There is evidence to suggest that good corporate governance can result in better performance. It would seem fairly obvious that companies with good ESG ratings are likely to be less risky investments e.g. the risk of environmental claims is likely to be lower as are corporate governance issues that can impact negatively on the share price. But they could also offer better long-term value as they are likely to be more sustainable businesses in the changing world.

Trustees’ action list:

  1. Discuss with investment advisers and asset managers and prepare a policy on those matters that the trustees consider are “financially material considerations” in relation to investment decisions including any ESG matters that the trustees consider are material. The policy should also cover non-financial matters;
  2. Agree a policy on stewardship matters;
  3. Include the policies in the SIP;
  4. Confirm in the SIP the arrangements with the asset managers;
  5. Ensure the SIP and implementation statement are published on a free and publicly available website at the required time and where necessary flag this to members via the annual benefit statement;
  6. Ensure that ESG, stewardship and arrangements with asset managers are standing agenda items and are considered when making investment decisions.

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